The Dow Jones Industrial, Transportation and Utilities Averages are maintained and reviewed by the Averages Committee. For the sake of continuity, composition changes are rare, and generally occur only after corporate acquisitions or other dramatic shifts in a component's core business. When such an event necessitates that one component be replaced, the entire index is reviewed. As a result, multiple component changes are often implemented simultaneously.
While there are no rules for component selection, a stock typically is added only if it has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the sector(s) covered by the average.
Unlike the DJTA and DJUA, which include only transportation and utilities stocks, the DJIA is not limited to traditionally defined industrial stocks. Instead, the index serves as a measure of the entire U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods.
Using the Dow
The Dow Jones Averages are stock market indexes, and as such can be used in two principal ways:
As a Yardstick
The most common use of an index by investors is to evaluate the performance of their own portfolios on a monthly or quarterly basis. This is the "benchmark" function of an index, and it constitutes the bogey that many investors try to beat with individual stock picks or with mutual funds. There is no official benchmark for the stock market. Each investor chooses his or her own. The only logical requirement is that the benchmark chosen should represent the part of the stock market that is targeted by the investor's portfolio. For example, if the investor dabbles in large stocks from a variety of industries, the Dow Jones Industrial Average might make a suitable benchmark. But if holdings in that portfolio also include some railroad stocks, say, and utilities, the more appropriate benchmark might be the Dow Jones Composite Average, which includes all stocks in the Industrial, Transportation and Utility Averages.
As a Barometer
What will happen next? That's the single important question in the stock market, and there never is an always-reliable answer – just as there isn't with the weather. But that doesn't stop people from making predictions. Like barometers measuring rising or falling air pressure, indexes can be used to help form judgments about the direction in which the market is heading, and whether it is moving tentatively or certainly. There are a host of technical and fundamental analytic techniques for this purpose, with indexes playing a major role in many of them. And because the market looms so large in the U.S. economy, some people extrapolate market behavior into indications of general economic vigor and health. One rule of thumb is that the stock market "anticipates" major trends in the economy by about six to nine months. But in the real word, such precise timing doesn't always hold true. For example, the bear market in stocks began in January 2000, while the economic recession began in March 2001, according to the National Bureau of Economic Research (NBER). The Dow Jones Industrial Average, which was the only major index to trace the entire bear market with the same component stocks, fell 37.8%, bottoming out in October 2002. Meanwhile, the NBER declared the recession over back in November 2001 (though it didn't get around to saying so until July 2003).